M&S launches new cash ISA

Last updated: Jan 23rd, 2009

News

M&S Money has launched a new cash ISA that offers a fixed or variable rate of interest – or a combination of both.

Savers opting for a variable rate of interest will earn 3.1% AER including a 1% bonus until 21 April 2010; however, as the rate of interest is variable it could fall if the Bank of England cuts base rate.

On the plus side, you can make unlimited withdrawals without penalty and also make regular payments of at least £25 by monthly direct debit.

If you would prefer the security of a fixed rate of interest, and have a lump sum of at least £500 to deposit, then opting for M&S’ fixed-rate ISA could be your best bet. If you choose to fix for one year, you'll earn 2.5% interest, rising to 2.75% if you fix for two or three years.

However, bear in mind that any early withdrawals will see you hit with a fixed flat penalty of up to £100.

Both M&S’ ISA options accept transfers.

With interest rates continuing to fall and household budgets under strain, many ISA savers are stuck between a rock and a hard place.

On one hand, fixed interest ISAs offer peace of mind as you know exactly what you'll earn on your money. But on the other, if you need to make withdrawals in an emergency you face a penalty.

One option available with the M&S ISA is combining the two different rates of interest. So, you can choose to lock a proportion of your £3,600 savings away in a fixed-rate aspect of the ISA and still have access to the rest if you need emergency access.

Andy Ripley, deputy Chief Executive of M&S Money, says: "We encourage people to make the most of tax-free savings, especially as 42% of people we surveyed don't use their cash ISA allowance."What else is out there?

Although M&S’ new ISA offers flexibility for savers, it’s rate is not the best out there. Birmingham Midshires has recently launched a one-year fixe- rate ISA paying 4.2% AER. You’ll need £500 to deposit upfront, and transfers are accepted.

Although fixed-rate ISAs are mainly aimed at people able to lock away a lump sum, BM does allow withdrawals by post. However, these are subject to a loss of 90 days' interest.

Further deposits are also permitted but, because this ISA is a bond, there is a limit to how much money can be invested in it. Once this limit has been reached, BM will close the ISA and no further deposits are allowed.

Elsewhere, Halifax also offers a fixed-rate ISA paying 4.1% on deposits of £500 – however, the term is four years and no further deposit or withdrawals are permitted during this period. Transfers from other ISAs are accepted.

Finally, Julian Hodge Bank pays 4% AER on its one-year fixed-rate ISA. Although withdrawals are allowed, these are subject to an exit fee. You can also only make withdrawals via post but transfers are accepted.

If you’d prefer a variable-rate ISA where access is easier, rates are slightly lower. Dudley BS pays 3.6% on its cash ISA on initial deposits of £100. Transfers are allowed.

Standard Life, meanwhile, pays 3.5% on its direct access ISA, which can be opened with just £1. You can make withdrawals without penalty and transfers are accepted.

Or Manchester Building Society pays 3.5% on its Premier Instant ISA. You'll need to deposit £1,000 upfront and you can make unlimited withdrawals.

ISA

Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.

ISA allowance

There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.

Exit fee

Not to be confused with an early repayment charge (ERC). Exit fees are levied on top of ERCs, which are a method of clawing back lost interest on a loan repaid early. By contrast, exit fees are charged for the administrative work this entails. They are charged as flat fees, from £150 to £300. However, in January 2007, following mortgage lenders surreptitiously raising fees sometimes by fivefold, the Financial Services Authority (FSA) intervened and most mortgage lenders removed exit fees from new mortgages. If you paid exit fees on your mortgage before January 2007, you may be able to claim them back.

Building society

This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.

Base rate

Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.

AER

Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.

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